Tax Legislation and Issues on
Islamic Financing*
Jennifer Chang
Senior Executive Director, Financial Services
23 May 2007
*connectedthinking



Agenda
•
•
•
•
Introduction
Malaysian tax legislation
2007 – Incentives for Islamic Finance
Examples
Page 2
Introduction
Introduction
•• Malaysian
Malaysian Government
Government has
has been
been promoting
promoting Islamic
Islamic Banking
Banking and
and
Finance
Finance in
in Malaysia
Malaysia
•• Certain
Certain tax
tax exemptions
exemptions have
have been
been provided
provided and
and these
these have
have been
been
refined
refined over
over the
the years
years
•• The
The recent
recent 2007
2007 Budget
Budget provided
provided further
further tax
tax incentives
incentives to
to Islamic
Islamic
Finance
Finance
Page 4
Introduction
Conventional Financing compared to Islamic Financing
Conventional financing arrangement
(3) Pays coupon / interest
(1) Issues securities / obtains loan
Customer/
Issuer
Financiers
(2) Funds
* Minimal tax implications apart from determining the tax deductibility of
coupons / interest and issuance costs
Page 5
Introduction
Conventional compared to Islamic Financing (contd’)
Islamic financing arrangement
(1) Funds
Customer/
Issuer
(1) Sale of asset
Financiers
(2) Asset repurchase / Ijarah (Lease)
(2) Securities issuance
* More complex tax considerations depending on the Islamic structure as there
is an underlying disposal of asset and repurchase of asset / Lease
Page 6
Malaysian Tax
Legislation
Malaysian tax legislation
•• In
In order
order to
to provide
provide tax
tax neutrality
neutrality to
to Islamic
Islamic funding
funding transactions,
transactions, the
the
Malaysian
Malaysian tax
tax legislation
legislation has
has certain
certain clauses
clauses specifically
specifically on
on Syariah
Syariah
based
based transactions
transactions
•• The
The main
main sections
sections in
in the
the Income
Income Tax
Tax Act,
Act, 1967
1967 are
are Section
Section 2(7)
2(7) and
and
Section
Section 2(8)
2(8)
•• RPGT
RPGT and
and stamp
stamp duty
duty exemptions
exemptions have
have also
also been
been provided
provided to
to facilitate
facilitate
Syariah
Syariah financing
financing transactions
transactions
Page 8
Malaysian Tax Legislation
Income
Income Tax
Tax Act,
Act, 1967
1967 (“ITA”)
(“ITA”)
Section
Section 2(7)
2(7)
•• Any
Any reference
reference in
in the
the ITA
ITA to
to interest
interest shall:
shall:
“……apply,
“……apply, mutatis
mutatis mutandis
mutandis to
to gains
gains or
or profits
profits
received
received and
and expenses
expenses incurred,
incurred, in
in lieu
lieu of
of interest,
interest, in
in
transactions
transactions conducted
conducted in
in accordance
accordance with
with the
the
principles
principles of
of Syariah”
Syariah”
a) Since interest is not allowed under Syari’ah principles, Islamic
financing transactions would have a “profit” element instead.
b) The Malaysian Income Tax Legislation treats “profits” in
Islamic transactions to be similar to interest – Sec. 2(7)
c) Therefore, the taxability or deductibility of “profits” would be
similar to the treatment of “interest” in a conventional financing
arrangement
Page 9
Malaysian Tax Legislation (contd’)
Analysis of Section 2(7)
Customer/
Issuer
Profit
Financiers/
SPV
a) “Profit” treated as interest and therefore, tax deductible if
funding has been used for business purposes or to
purchase assets to generate income
b) All tax rules relating to “interest”, such as interest
withholding tax and exemptions will equally apply on the
“profit”
Page 10
Malaysian Tax Legislation (contd’)
Income
Income Tax
Tax Act,
Act, 1967
1967 (“ITA”)
(“ITA”)
Section
Section 2(8)
2(8)
•• Any
Any reference
reference in
in the
the ITA
ITA to
to the
the disposal
disposal of
of an
an
asset
asset or
or aa lease
lease shall:
shall:
“exclude
“exclude any
any disposal
disposal of
of an
an asset
asset or
or lease
lease by
by or
or
to
to aa person
person pursuant
pursuant to
to aa scheme
scheme of
of financing
financing
approved
approved by
by the
the Central
Central Bank,
Bank, the
the Securities
Securities
Commission
Commission or
or LOFSA,
LOFSA, as
as aa scheme
scheme which
which is
is in
in
accordance
accordance with
with the
the principles
principles of
of Syariah
Syariah where
where
such
such disposal
disposal is
is strictly
strictly required
required for
for the
the
purposes
purposes of
of complying
complying with
with those
those principles
principles
but
but which
which will
will not
not be
be required
required in
in any
any other
other
schemes
schemes of
of financing”
financing”
Page 11
Malaysian Tax Legislation (contd’)
Analysis of Section 2(8)
(1) Funds
Customer/
Issuer
(1) Sale of asset
(2) Asset repurchase/ Ijarah (Lease)
Financiers /
Malaysian
SPV
(2) Securities issuance
* Section 2(8) seeks to ignore the underlying transaction so that tax neutrality
can be achieved in Islamic funding transactions
Page 12
Malaysian Tax Legislation (contd’)
Real
Real Property
Property Gains
Gains Tax
Tax Act,
Act, 1976
1976 (“RPGT
(“RPGT Act”)
Act”)
Sch
Sch2,
2,Para
Para3(g)
3(g)
(amended)
(amended)
““ the
the disposal
disposal of
of any
any chargeable
chargeable assets
assets pursuant
pursuant to
to aa
scheme
scheme of
of financing
financing approved
approved by
by the
the Central
Central Bank;
Bank; or
or
the
the Securities
Securities Commission
Commission as
as aa scheme
scheme which
which is
is in
in
accordance
accordance with
with the
the principles
principles of
of Syariah,
Syariah, where
where such
such
disposal
disposal is
is strictly
strictly required
required for
for the
the purpose
purpose of
of
compliance
compliance with
with those
those principles
principles but
but which
which will
will not
not be
be
required
required for
for any
any other
other schemes
schemes of
of financing”
financing”
RPGT
RPGT (Exemption)
(Exemption)
Order
Order No.
No. 3,
3, 2003
2003
Exempts
Exempts any
any person
person from
from payment
payment of
of RPGT
RPGT in
in respect
respect
of
of chargeable
chargeable gains
gains accruing
accruing on
on the
the disposal
disposal of
of any
any
chargeable
chargeable assets
assets in
in relation
relation to
to the
the issuance
issuance of
of PDS
PDS
under
under Islamic
Islamic principles.
principles.
Page 13
Malaysian Tax Legislation (contd’)
Real
Real Property
Property Gains
Gains Tax
Tax Act,
Act, 1976
1976 (“RPGT
(“RPGT Act”)
Act”)
RPGT
RPGT(Exemption)
(Exemption)
Order
Order2001
2001
Exempts
Exempts any
any person
person from
from the
the payment
payment of
of RPGT
RPGT in
in
respect
respect of
of chargeable
chargeable gains
gains accruing
accruing on
on the
the disposal
disposal of
of
any
any chargeable
chargeable assets
assets ––
a)
a) to
to or
or in
in favour
favour of
of aa special
special purpose
purpose vehicle;
vehicle; or
or
b)
b)in
in connection
connection with
with the
the repurchase
repurchase of
of the
the
chargeable
chargeable assets,
assets, to
to or
or in
in favour
favour of
of the
the person
person
from
from whom
whom those
those assets
assets were
were acquired,
acquired, for
for the
the
purpose
purpose of
of securitization
securitization transaction.
transaction.
Page 14
Malaysian Tax Legislation (contd’)
Stamp
Stamp Act
Act 1949
1949 (“Stamp
(“Stamp Act”)
Act”)
First
First Schedule
Schedule of
of
the
the Stamp
Stamp Act
Act ––
insertion
insertion of
of aa new
new
paragraph
paragraph under
under
“GENERAL
“GENERAL
EXEMPTIONS”
EXEMPTIONS”
•• An
An instrument
instrument executed
executed pursuant
pursuant to
to aa scheme
scheme of
of
Various
Various Stamp
Stamp
Duty
Duty Exemption
Exemption
Orders
Orders
•• Various
Various exemptions
exemptions have
have been
been provided
provided on
on purchase
purchase
financing
financing approved
approved by
by the
the Central
Central Bank
Bank or
or the
the
Securities
Securities Commission
Commission as
as aa scheme
scheme which
which is
is in
in
accordance
accordance with
with the
the principles
principles of
of Syariah,
Syariah, where
where such
such
instrument
instrument is
is an
an additional
additional instrument
instrument strictly
strictly
required
required for
for the
the purpose
purpose of
of compliance
compliance with
with those
those
principles
principles but
but which
which will
will not
not be
be required
required for
for any
any other
other
schemes
schemes of
of financing.
financing.
of
of property
property by
by any
any financier
financier for
for the
the purpose
purpose of
of resale
resale
under
under the
the principles
principles of
of Syariah
Syariah as
as well
well as
as Ijarah
Ijarah
transactions.
transactions.
Page 15
Malaysian Tax Legislation (contd’)
Income
Income Tax
Tax Act,
Act, 1967
1967 (“ITA”)
(“ITA”)
Income
Income Tax
Tax (Deduction
(Deduction
for
for expenditure
expenditure on
on
issuance
issuance of
of Islamic
Islamic
securities)
securities) Rules
Rules 2005
2005
•• Provides
Provides for
for tax
tax deduction
deduction in
in respect
respect of
of expenses
expenses
Income
Income Tax
Tax (Deduction
(Deduction
for
for expenditure
expenditure on
on
issuance
issuance of
of Islamic
Islamic
securities
securities pursuant
pursuant to
to
Istisna’
Istisna’ principle)
principle) Rules
Rules
2005
2005
•• Provides
Provides for
for tax
tax deduction
deduction in
in respect
respect of
of expenses
expenses
incurred
incurred on
on issuance
issuance of
of Islamic
Islamic securities
securities which
which
adopt
adopt the
the principles
principles of
of mudharabah,
mudharabah, musyarakah
musyarakah
and
and ijarah
ijarah from
from 33 July
July 2004
2004 to
to the
the year
year of
of
assessment
assessment 2007
2007
incurred
incurred on
on issuance
issuance of
of Islamic
Islamic securities
securities based
based
on
on istisna’
istisna’ from
from 33 July
July 2004
2004 to
to the
the year
year of
of
assessment
assessment 2007
2007
• Therefore, issuance costs of Islamic Bonds based on principles of
mudharabah, musyarakah, Ijarah and Istisna’ will be tax deductible
from 3 July 2004 to year of assessment 2007
Page 16
2007 Budget
Incentives
– Islamic finance
Incentives
Islamic Finance
• Substantial tax incentives have
a
Islamic
Banking
b
Fund
Management
Takaful
Tax
Incentives
Capital
Markets
c
Human Capital
Others
d
been provided to Financial
Services sector
• Most of the tax incentives are
towards the development of
Malaysia as an International
Islamic Financial Centre
• Tax incentives can be broadly
categorised into the following
areas:
a) Islamic Banking and Takaful
b) Fund Management
c) Capital markets
d) Human capital and others
Page 18
Incentives
a) Islamic Banking and Takaful
Islamic Banking and Takaful
1. Income tax exemption for Islamic Banking and
Takaful business
2. Tax exemption – Profits paid by Islamic Banks
to non-residents
3. Tax neutrality of Islamic financing transactions
– Musyarakah financing not required to file
partnership tax returns
Page 19
Incentives – Islamic Banking and Takaful
1.Income Tax Exemption for Islamic Banking and Takaful
Business
Proposed
Licensed by BNM under
Islamic Banking Act / Takaful Act
Islamic Bank
Islamic
Bank
Takaful
companies
Takaful
companies
Domestic
business
continue to be
taxed at 28%
International
Currency
Divisions
Islamic
International
Currency Banks /
International
Currency Takaful
Operators
10 year tax exemption
Income tax exemption for 10 years:
• Islamic banks / units licensed under
Islamic Banking Act 1983 on income
derived from Islamic banking
business conducted in international
currencies, including transactions
with Malaysian residents
• Takaful companies/ units licensed
under Takaful Act 1984 on income
derived from Takaful business
conducted in international
currencies, including transactions
with Malaysian residents
Effective from YA 2007 to YA 2016
(Awaiting PU Order)
Page 20
Incentives – Islamic Banking and Takaful
2. Tax exemption – Profits paid by Islamic Banks to non-residents
Current
Interest
Banks licensed
under BAFIA
Islamic
window
Exempted
from tax
Non-resident
customers
Profit
Paragraph 33 Schedule 6 provides that interest income received by non-residents
from banking and financial institutions established under Banking and Financial
Institutions Act, 1989 is exempted from tax.
Proposed
• Banking and financial
institutions established under
Islamic Banking Act, 1983
• Other financial institutions
approved by the Ministry of
Finance
Profits in lieu of
interest income
received by nonresidents
Exempted from tax
Stream line tax treatment on profits “interest received from Islamic banks and conventional banks
Effective from 2/9/2006
(Amendments made to Schedule 6 Paragraph 33)
Page 21
Incentives – Islamic Banking and Takaful
3. Tax neutrality– Musyarakah financing
Islamic
Islamic bank
bank
Loan
Loan applicant
applicant
Musyarakah
Purchase properties
or investments
Question:
Will the
Musyarakah
venture be taxed
as a partnership ?
• Currently, definition of “partnership”
includes all types of partnership, the
only exception being a Hindu joint
family
• Proposed:
Definition amended to exclude “any
association which is established
pursuant to a scheme of financing in
accordance with the principles of
Syariah”
• Provide tax neutrality to Islamic financing structures based on the concept
of Musyarakah
• No separate partnership tax return is required to be submitted
Effective from YA 2007
(Amendment to Section 2)
Page 22
Incentives
b) Fund Management
1. Tax exemption for companies
managing foreign Islamic funds
2. REITs - Tax transparency system
refined further
3. REITs investors – reduction in tax
rates
Page 23
Incentives – Fund Management
1. Tax exemption for companies managing foreign Islamic funds
Current
Proposed
• Local and foreign companies
licensed by the Securities
Commission (“SC”) under the
Approved Foreign Fund
Management status and
managing foreign investors’
funds are taxed at 10% on fees
received from foreign investors
• Local and foreign companies
managing funds of foreign
investors established under
Shariah principles be given
full tax exemption on
management fees for 10 years
• Fund must be approved by SC
Clarification required:
What has been defined as “funds of foreign investors” ?
Effective from YA 2007 to YA 2016
(Awaiting exemption order)
Page 24
Incentives – Fund Management
2. REITs - Tax transparency system refined further
Current
Approved
REITs
Malaysian
Investors
Taxed at own
marginal rates
of tax
Foreign
Investors
28% WHT
Distribution
Retains income
Income Not Distributed:
• Continue to be taxed 28% at
REIT level
Income Distributed:
• Income distributed will not be taxed at
REIT level
• Instead, investors will be taxed on the
income distributed based on their
marginal rates of tax
• Withholding tax of 28% on distributions
to non-resident investors
Page 25
Incentives – Fund Management
2. REITs - Tax transparency system refined further (cont’d)
Proposed
Approved
REITs
Approved
REITs
Distributes at least 90% of income
Distributes less than 90% of income
• REITs will be exempted
from tax on all income
• REITs will be subject to income tax
on chargeable income at normal
corporate income tax (e.g. 28%)
• Investors will be entitled to tax credit
on tax already paid by REITs
Effective from YA 2007
Page 26
Incentives – Fund Management
3. REITs investors – Reduction in tax rates
REIT
Distributions
Current tax treatment
Proposed tax treatment
Individuals
& Noncorporate
Investors
Resident
Taxed at own marginal rate
of tax
Withholding tax of 15%
Non-resident
Withholding tax of 28%
Withholding tax of 15%
Corporate
Investors
Resident
Taxed at normal corporate
tax rate (28% currently)
Existing tax treatment
(27% effective YA 2007)
Non-resident
Withholding tax at 28%
Existing tax treatment
(27% withholding tax from
1.1.2007)
Foreign
Withholding tax at 28%
Withholding tax of 20%
Institutional
investors*
*Institutional investors
- pension fund, collective investment scheme or such other person approved by the Minister
Effective from 1/1/2007 ( 5 year tax incentive)
(Amendments to tax act)
Page 27
Incentives
c) Islamic capital market
1. Expenses to establish Islamic stock
broking companies
2. Extension of tax incentive for issuance of
Islamic securities
3. Tax treatment of SPV for Islamic financing
4. Profits on foreign currency bonds
Page 28
Incentives – Islamic capital market
1. Tax deduction on expenses to establish Islamic stock broking
companies
Tax incentive
Establishment expenses
• Pre-commencement expenses
are generally not deductible
(except for certain incorporation
expenses).
• Consultancy
• Islamic stock broking company A tax deduction allowed
equivalent to the establishment
expenses incurred
• Cost of market research
• Legal fees
• Cost of feasibility study
• Cost of obtaining license and
business approval
- Applications received by SC from 2/9/2006 until 31/12/2009
- Company must commence business within 2 years from date of
approval from the SC
(PU Order gazetted)
Page 29
Incentives – Islamic capital market
2. Extension of tax incentive for issuance of Islamic securities
• Expenses incurred on issuance of Islamic securities extended to another 3
years to 2010
• Incentive will also be given to all Islamic securities products approved
by the Securities Commission
Issuance of bonds based on:
Ijarah
Istisna’
Mudharabah
Musyarakah
Tax deduction of issuance
costs up to 2010
Others approved by SC
(including Al-Bai
Bithaman Ajil and
Murabahah ?)
Tax deduction of
issuance costs from
YA 2008 to 2010
Page 30
Incentives – Islamic capital market
3. Tax treatment of special purpose vehicle (“SPV”) for Islamic
financing
Example of Islamic bond issuance
Funds flow
Malaysian
Company
Sale of
assets
Leaseback
Funds flow
Foreign investors
SPV
in Malaysia
Bonds
Malaysian
investors
Lease payments
Profits / “Interest”
• Under Islamic financing transactions, SPV is set up purely to channel funds
and facilitate issuance of Islamic bonds/ funding
• Currently, SPV is subject to income tax and administrative requirements
under Income Tax Act, 1967 (“ITA”)
• SPV not subject to income tax and not required to comply with ITA
administrative requirements. Certain conditions and clarification required.
Effective from YA 2007
Page 31
Incentives – Islamic capital market
4. Tax exemption – Profits on foreign currency bonds
Current
Interest
Bonds in Ringgit
Exempted
from tax
Non-resident
customers
Profit
Interest or profits on Ringgit bonds approved by the Securities Commission is not
subject to withholding tax.
Recent announcement
Bonds in foreign currency
To be exempted and not
subject to withholding tax
Page 32
Incentives
d) Human capital and others
1. Tax relief for individuals on
Islamic Finance courses
2. Additional 20% stamp duty
exemption on Islamic Financial
instruments
3. Stamp duty exemption for loans
to SMEs
Page 33
Incentives – Human capital and others
1. Tax relief for individuals on Islamic Finance courses
Current
Proposed
• Relief of up to RM5,000 per
annum for fees paid for certain
courses at local institution of
higher education
• Relief extended to courses in
Islamic finance approved by
Bank Negara Malaysia or
Securities Commission at local
institutions of higher education,
including at the International
Centre for Education in Islamic
Finance (“INCEIF”)
(i.e. science, technical,
vocational, industrial skills
development, information and
communication technology,
accountancy and law)
Effective from YA 2007
Page 34
Incentives – Human capital and others
2. Additional 20% Stamp duty exemption on Islamic Instruments
Stamp Duty (Remission)(No.2) Order 2007
• Additional 20% stamp duty exemption is given on instruments used
in Islamic financing
• Instrument has to be approved by Bank Negara Malaysia Syariah
Advisory Council or Securities Commission
Effective from 2 /9/2006 to 31/12/2009
Recent announcement
• 100% stamp duty exemption for 10 years on foreign currency instruments
executed by Islamic financial institutions and on instruments relating to Ringgit
as well as foreign currency Islamic securities.
Page 35
Examples
Example 1
Al-Bai
Al-Bai Bithaman
Bithaman Ajil
Ajil
(“ABBA”)
(“ABBA”)
Sale
Sale and
and purchase
purchase
transaction
transaction for
for the
the
financing
financing of
of an
an asset
asset on
on
aa deferred
deferred payment
payment
basis
basis with
with aa pre-agreed
pre-agreed
payment
payment period.
period.
The
The sale
sale price
price will
will
include
include aa profit
profit margin.
margin.
Essentially
Essentially aa sale
sale and
and
buyback
buyback arrangement
arrangement
Proceeds
1. Issuer sells assets to financiers
Malaysian
Bank / SPV
Issuer
2. Issuer purchases the same
assets from financiers at a
marked-up price
Issues ABBA bonds with obligation to pay
financiers the purchase amount
Page 37
Example 1 – ABBA (contd’)
Malaysian
Malaysian Tax
Tax considerations
considerations based
based on
on current
current rules
rules
•• Based
Based on
on Section
Section 2(8)
2(8) of
of the
the ITA,
ITA, the
the disposal
disposal of
of the
the asset
asset will
will be
be
disregarded
disregarded for
for income
income tax
tax purposes
purposes
•• So,
So, there
there should
should not
not be
be any
any RPGT
RPGT or
or income
income tax
tax impact
impact on
on the
the disposal
disposal of
of
properties
properties or
or assets
assets
•• Stamp
Stamp duty
duty exemption
exemption will
will mean
mean that
that no
no additional
additional stamp
stamp duty
duty will
will be
be
applicable
applicable compared
compared to
to aa conventional
conventional transaction
transaction
•• Based
Based on
on Section
Section 2(7),
2(7), the
the profit
profit element
element will
will be
be treated
treated as
as “interest”
“interest” for
for tax
tax
purposes.
purposes. Tax
Tax deductibility
deductibility therefore
therefore available
available depending
depending on
on usage
usage of
of
funds
funds
•• Issuance
Issuance cost
cost not
not tax
tax deductible
deductible since
since bond
bond has
has not
not been
been issued
issued based
based on
on
mudharabah,
mudharabah, musyarakah,
musyarakah, ijarah
ijarah or
or istisna
istisna
Page 38
Example 2
Ijarah
Ijarah
AA contract
contract for
for the
the sale
sale
of
of benefits
benefits and
and
services
services between
between the
the
owner
owner of
of the
the assets
assets
(“lessor”)
(“lessor”) and
and the
the
user
user of
of those
those same
same
assets
assets (“lessee”)
(“lessee”) at
at an
an
agreed
agreed price
price
1. Sale of assets/properties
Issuer
2. Leaseback assets
in return for Al-Ijarah
rental stream
Malaysian
Bank / SPV
3. Issue Sukuk
Al-Ijarah
Bonds
Investors
Page 39
Example 2 – Ijarah (contd’)
Tax
Tax considerations
considerations
•• Disposal
Disposal of
of the
the assets
assets is
is disregarded
disregarded for
for the
the purpose
purpose of
of income
income tax
tax based
based
on
on Section
Section 2(8)
2(8) of
of the
the ITA
ITA
•• No
No RPGT
RPGT impact
impact on
on the
the disposal
disposal of
of properties
properties
•• No
No additional
additional stamp
stamp duty
duty will
will be
be applicable
applicable compared
compared to
to aa conventional
conventional
transaction
transaction
•• Based
Based on
on Section
Section 2(7),
2(7), the
the profit
profit element
element will
will be
be treated
treated as
as “interest”
“interest” for
for tax
tax
purposes
purposes
•• Still
Still need
need to
to consider
consider impact
impact of
of Income
Income Tax
Tax Leasing
Leasing Regulations
Regulations (if
(if any)
any)
•• Taxation
Taxation of
of SPV
SPV needs
needs to
to be
be considered
considered
•• Issuance
Issuance cost
cost will
will be
be tax
tax deductible
deductible since
since bond
bond has
has been
been issued
issued based
based on
on
Ijarah
Ijarah
Page 40
Example 3
Tax
Tax considerations
considerations
Acquisition and holding of vehicles as
inventory
Islamic
bank
Customer
Regulations
Regulations (ITLR)
(ITLR) apply
apply to
to the
the
Islamic
Islamic Bank?
Bank?
•• Leasing
Leasing income
income treated
treated as
as separate
separate
Ijarah
Purchase vehicle
and hold as
inventory
•• Would
Would Income
Income Tax
Tax Leasing
Leasing
source
source of
of the
the Islamic
Islamic Bank
Bank
Sell or lease
motor vehicles
•• Common
Common expenses
expenses and
and funding
funding
costs
costs need
need to
to be
be segregated
segregated based
based
on
on aa formula
formula
•• Capital
Capital allowances
allowances quarantined
quarantined to
to
leasing
leasing source
source
Some
Some Islamic
Islamic banking
banking products
products
include
include the
the Islamic
Islamic bank
bank entering
entering
into
into arrangements
arrangements where
where the
the asset
asset
is
is owned
owned by
by the
the Islamic
Islamic Bank
Bank
legally
legally
•• Could
Could increase
increase effective
effective tax
tax rate
rate
Page 41
Example 4
Musyarakah arrangements
Islamic bank
Loan applicant
Musyarakah
Purchase equity in
companies
•• Islamic
Islamic bank
bank enters
enters into
into
“partnership”
“partnership” with
with customer
customer in
in
order
order to
to fund
fund an
an acquisition
acquisition or
or
project
project
•• Effective
Effective YA
YA 2007,
2007, no
no need
need to
to file
file
separate
separate partnership
partnership tax
tax return
return
• Investments in
various sectors
(e.g. halal food,
plantations, etc.)
•• Islamic
Islamic Bank
Bank will
will be
be taxed
taxed on
on
returns
returns from
from Musyarakah
Musyarakah
• Project financing
Page 42
Example 5 – Case study
Foreign
Foreign Ijarah
Ijarah
AA contract
contract for
for the
the sale
sale
of
of benefits
benefits and
and
services
services between
between the
the
owner
owner of
of the
the assets
assets
(“lessor”)
(“lessor”) and
and the
the
user
user of
of those
those same
same
assets
assets (“lessee”)
(“lessee”) at
at an
an
agreed
agreed price
price
1. Sale of assets/properties
Issuer
2. Leaseback assets
in return for Al-Ijarah
rental stream
Labuan or
Foreign Bank /
SPV
3. Issue Sukuk
Al-Ijarah
Bonds
Investors
How would this transaction be treated for tax purposes ?
Page 43
Example 5 – Foreign Ijarah (contd’)
Questions
Questions
•• How
How would
would disposal
disposal be
be treated
treated for
for tax
tax purposes
purposes ??
•• Any
Any income
income tax
tax or
or RPGT
RPGT impact
impact ??
•• Tax
Tax deductibility
deductibility of
of funding
funding costs
costs ?? Withholding
Withholding tax
tax impact
impact ??
•• Issuance
Issuance costs
costs tax
tax deductible
deductible ??
Page 44
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